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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2023-04-27 compared with 2022-10-31 · 58 added, 55 removed, 157 unchanged (42% of the section changed)

5 unchanged sentences

Our view of potential risks and our sensitivity to such risks is discussed in our 2022 Annual Report on Form 10-K, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, Page 112.

The fair value of our investment portfolio was $20.574 billion at September 30, 2022, down $3.763 billion from year-end 2021, including a $1.288 billion decrease in the fixed-maturity portfolio and a $2.475 billion decrease in the equity portfolio.

(Dollars in millions) At September 30, 2022 At December 31, 2021

The fair value of our investment portfolio was $22.645 billion at March 31, 2023, up $672 million from year-end 2022, including a $546 million increase in the fixed-maturity portfolio and a $126 million increase in the equity portfolio.

(Dollars in millions) At March 31, 2023 At December 31, 2022

amortized cost Percent

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Total $ 17,673 100.0 % $ 22,645 100.0 % $ 17,273 100.0 % $ 21,973 100.0 %

At September 30, 2022, substantially all of our consolidated investment portfolio, measured at fair value, is classified as Level 1 or Level 2.

At March 31, 2023, substantially all of our consolidated investment portfolio, measured at fair value, is classified as Level 1 or Level 2.

See Item 1, Note 3, Fair Value Measurements, for additional discussion of our valuation techniques.

In addition to our investment portfolio, the total investments amount reported in our condensed consolidated balance sheets includes Other invested assets.

Other invested assets included $311 million of private equity investments, $38 million in Lloyd's deposits, $35 million of real estate through direct property ownership and development projects in the United States and $30 million of life policy loans at September 30, 2022.

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

Other invested assets included $352 million of private equity investments, $60 million of real estate through direct property ownership and development projects in the United States, $36 million in Lloyd's deposits and $30 million of life policy loans at March 31, 2023.

Cincinnati Financial Corporation First-Quarter 2023 10-Q

FIXED-MATURITY SECURITIES INVESTMENTS

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By regularly investing in the bond market, we build a broad, diversified portfolio that we believe mitigates the impact of adverse economic factors.

In the first nine months of 2022, the decrease in fair value of our fixed-maturity portfolio reflected net purchases of securities, offset by a decrease in net unrealized gains, primarily due to an increase in U.S.

Treasury yields and a widening of corporate credit spreads.

At September 30, 2022, our fixed-maturity portfolio with an average rating of A3/A was valued at 91.6% of its amortized cost, compared with 106.5% at December 31, 2021.

At September 30, 2022, our investment-grade and noninvestment-grade fixed-maturity securities represented 79.6% and 4.5% of the portfolio, respectively.

In the first three months of 2023, the increase in fair value of our fixed-maturity portfolio reflected net purchases of securities and a decrease in net unrealized losses, primarily due to a decrease in U.S.

Treasury yields that was partially offset by a widening of corporate credit spreads.

At March 31, 2023, our fixed-maturity portfolio with an average rating of A2/A was valued at 94.9% of its amortized cost, compared with 93.5% at December 31, 2022.

At March 31, 2023, our investment-grade and noninvestment-grade fixed-maturity securities represented 80.4% and 4.1% of the portfolio, respectively.

The remaining 15.5% represented fixed-maturity securities that were not rated by Moody's or S&P Global Ratings.

Attributes of the fixed-maturity portfolio include:

At September 30, 2022 At December 31, 2021

At March 31, 2023 At December 31, 2022

Weighted average yield-to-amortized cost 4.39 % 4.22 %

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We discuss maturities of our fixed-maturity portfolio in our 2022 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 134, and in this quarterly report Item 2, Investments Results.

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

Cincinnati Financial Corporation First-Quarter 2023 10-Q

TAXABLE FIXED MATURITIES

Our taxable fixed-maturity portfolio, with a fair value of $8.036 billion at September 30, 2022, included:

(Dollars in millions) At September 30, 2022 At December 31, 2021

Our taxable fixed-maturity portfolio, with a fair value of $8.749 billion at March 31, 2023, included:

(Dollars in millions) At March 31, 2023 At December 31, 2022

Investment-grade corporate $ 6,579 $ 6,369

1 unchanged sentence

Noninvestment-grade corporate 512 500

Government-sponsored enterprises 387 183

Commercial mortgage-backed 225 234

United States government 195 191

Government-sponsored enterprises 119 8

Foreign government 31 33

1 unchanged sentence

Our strategy is to buy, and typically hold, fixed-maturity investments to maturity, but we monitor credit profiles and fair value movements when determining holding periods for individual securities.

With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 1.2% of the taxable fixed-maturity portfolio at September 30, 2022.

Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB by S&P Global Ratings and represented 76.6% of the taxable fixed-maturity portfolio's fair value at September 30, 2022, compared with 76.9% at year-end 2021.

With the exception of United States agency issues that include government-sponsored enterprises, no individual issuer's securities accounted for more than 1.3% of the taxable fixed-maturity portfolio at March 31, 2023.

Our investment-grade corporate bonds had an average rating of Baa1 by Moody's or BBB by S&P Global Ratings and represented 75.2% of the taxable fixed-maturity portfolio's fair value at March 31, 2023, compared with 76.7% at year-end 2022.

The heaviest concentration in our investment-grade corporate bond portfolio, based on fair value at

September 30, 2022, was the financial sector.

March 31, 2023, was the financial sector.

It represented 42.2% of our investment-grade corporate bond portfolio, compared with 42.7% at year-end 2022.

The energy sector represented 10.2% and was less than 10% at year-end 2021.

The energy sector represented 11.1% and was 10.8% at year-end 2022.

No other sector exceeded 10% of our investment-grade corporate bond portfolio.

Our taxable fixed-maturity portfolio at September 30, 2022, included $240 million of commercial mortgage-backed securities with an average rating of Aa2/AA-.

As discussed in our 2022 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 32, investments in the financial sector include various risks.

See risk factors entitled “Financial disruption or a prolonged economic downturn could materially and adversely affect our investment performance” and “Our ability to achieve our performance objectives could be affected by changes in the financial, credit and capital markets or the general economy”.

Our taxable fixed-maturity portfolio at March 31, 2023, included $225 million of commercial mortgage-backed securities with an average rating of Aa2/AA-.

TAX-EXEMPT FIXED MATURITIES

At September 30, 2022, we had $3.698 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody's and S&P Global Ratings.

At March 31, 2023, we had $3.929 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody's and S&P Global Ratings.

We traditionally have purchased municipal bonds focusing on general obligation and essential services issues, such as water, waste disposal or others.

The portfolio is well diversified among approximately 1,700 municipal bond issuers.

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at September 30, 2022.

No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at March 31, 2023.

INTEREST RATE SENSITIVITY ANALYSIS

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As part of this model, the effective duration of the fixed-maturity portfolio is continually monitored by our investment department to evaluate the theoretical impact of interest rate movements.

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

Cincinnati Financial Corporation First-Quarter 2023 10-Q

The table below summarizes the effect of hypothetical changes in interest rates on the fair value of the fixed-maturity portfolio:

1 unchanged sentence

-200 -100 — 100 200

At September 30, 2022 $ 12,928 $ 12,329 $ 11,734 $ 11,145 $ 10,580

At March 31, 2023 $ 13,866 $ 13,268 $ 12,678 $ 12,082 $ 11,485

At December 31, 2022 $ 13,300 $ 12,714 $ 12,132 $ 11,548 $ 10,974

The effective duration of the fixed-maturity portfolio as of September 30, 2022, was 5.0 years, up from 4.8 years at year-end 2021.

The effective duration of the fixed-maturity portfolio as of March 31, 2023, was 4.6 years, down from 4.7 years at year-end 2022.

The above table is a theoretical presentation showing that an instantaneous, parallel shift in the yield curve of 100 basis points could produce an approximately 4.7% change in the fair value of the fixed-maturity portfolio.

5 unchanged sentences

EQUITY INVESTMENTS

Our equity investments, with a fair value totaling $8.840 billion at September 30, 2022, included $8.433 billion of common stock securities of companies generally with strong indications of paying and growing their dividends.

Our equity investments, with a fair value totaling $9.967 billion at March 31, 2023, included $9.589 billion of common stock securities of companies generally with strong indications of paying and growing their dividends.

Other criteria we evaluate include increasing sales and earnings, proven management and a favorable outlook.

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-30% -20% -10% — 10% 20% 30%

At September 30, 2022 $ 6,188 $ 7,072 $ 7,956 $ 8,840 $ 9,724 $ 10,608 $ 11,492

At March 31, 2023 $ 6,977 $ 7,974 $ 8,970 $ 9,967 $ 10,964 $ 11,960 $ 12,957

At December 31, 2022 $ 6,889 $ 7,873 $ 8,857 $ 9,841 $ 10,825 $ 11,809 $ 12,793

At September 30, 2022, Apple Inc.

At March 31, 2023, Apple Inc.

(Nasdaq:AAPL) was our largest single common stock holding with a fair value of $758 million, or 7.9% of our publicly traded common stock portfolio and 3.3% of the total investment portfolio.

Thirty-five holdings among eight different sectors each had a fair value greater than $100 million.

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

Forty-one holdings among nine different sectors each had a fair value greater than $100 million.

Cincinnati Financial Corporation First-Quarter 2023 10-Q

Common Stock Portfolio Industry Sector Distribution

Percent of common stock portfolio

At September 30, 2022 At December 31, 2021

At March 31, 2023 At December 31, 2022

Financial S&P 500 Industry

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UNREALIZED INVESTMENT GAINS AND LOSSES

At September 30, 2022, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $37 million and unrealized investment losses amounted to $1.115 billion before taxes.

The $1.078 billion net unrealized loss position in our fixed-maturity portfolio at September 30, 2022, moved from a net unrealized gain position to a net unrealized loss position in the first nine months of 2022, primarily due to an increase in U.S.

Treasury yields and a widening of corporate credit spreads.

At March 31, 2023, unrealized investment gains before taxes for the fixed-maturity portfolio totaled $92 million and unrealized investment losses amounted to $776 million before taxes.

The $684 million net unrealized loss position in our fixed-maturity portfolio at March 31, 2023, decreased in the first three months of 2023, primarily due to a decrease in U.S.

Treasury yields that was partially offset by a widening of corporate credit spreads.

The net loss position for our current fixed-maturity holdings will naturally decline over time as individual securities approach maturity.

2 unchanged sentences

We believe that the appreciated value of equity securities, compared with the cost of securities that is generally used as a tax basis, is a useful measure to help evaluate how fair value can change over time.

On this basis, the net unrealized investment gains at September 30, 2022, consisted of a net gain position in our equity portfolio of $4.548 billion.

On this basis, the net unrealized investment gains at March 31, 2023, consisted of a net gain position in our equity portfolio of $5.656 billion.

Events or factors such as economic growth or recession can affect the fair value and unrealized investment gains of our equity securities.

The five largest holdings in our common stock portfolio were Apple, Microsoft (Nasdaq:MSFT), UnitedHealth Group Inc.

(NYSE:UNH), Accenture Co.

(NYSE:ACN) and AbbVie Inc.

The five largest holdings in our common stock portfolio were Apple, Microsoft (Nasdaq:MSFT), Broadcom Inc.

(Nasdaq:AVGO), UnitedHealth Group Inc.

(NYSE:UNH), and AbbVie Inc.

(NYSE:ABBV), which had a combined fair value of $2.411 billion.

2 unchanged sentences

Further, amortized costs for some securities are revised through write-downs recognized in prior periods.

At September 30, 2022, 4,049 of the 4,495 fixed-maturity securities we owned had fair values below amortized cost, compared with 278 of the 4,329 securities we owned at year-end 2021.

The 4,049 holdings with fair values below amortized cost at September 30, 2022, represented 90.7% of the fair value of our fixed-maturity investment portfolio and $1.115 billion in unrealized losses.

• 2,508 of the 4,049 holdings had fair value between 90% and 100% of amortized cost at September 30, 2022.

At March 31, 2023, 2,900 of the 4,606 fixed-maturity securities we owned had fair values below amortized cost, compared with 3,272 of the 4,521 securities we owned at year-end 2022.

The 2,900 holdings with fair values below amortized cost at March 31, 2023, represented 39.9% of the fair value of our fixed-maturity investment portfolio and $776 million in unrealized losses.

• 1,905 of the 2,900 holdings had fair value between 90% and 100% of amortized cost at March 31, 2023.

These primarily consist of securities whose current valuation is largely the result of interest rate factors.

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• 969 of the 2,900 fixed-maturity holdings had fair value between 70% and 90% of amortized cost at

September 30, 2022.

We believe the 1,423 fixed-maturity securities will continue to pay interest and ultimately

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

pay principal upon maturity.

March 31, 2023.

We believe the 969 fixed-maturity securities will continue to pay interest and ultimately pay

Cincinnati Financial Corporation First-Quarter 2023 10-Q

principal upon maturity.

The issuers of these 969 securities have strong cash flow to service their debt and meet their contractual obligation to make principal payments.

The fair value of these securities was $2.394 billion, and they accounted for $511 million in unrealized losses.

• 118 of the 4,049 fixed-maturity holdings had fair value below 70% of amortized cost at September 30, 2022.

• 26 of the 2,900 fixed-maturity holdings had fair value below 70% of amortized cost at March 31, 2023.

We believe these fixed-maturity securities will continue to pay interest and ultimately pay principal upon maturity.

2 unchanged sentences

(Dollars in millions) Less than 12 months 12 months or more Total

At September 30, 2022 Fair value Unrealized

At March 31, 2023 Fair value Unrealized

losses Fair value Unrealized

3 unchanged sentences

States, municipalities and political subdivisions 1,287 48 890 178 2,177 226

Government-sponsored enterprises 263 3 7 1 270 4

Commercial mortgage-backed 107 5 116 11 223 16

United States government 121 1 52 3 173 4

Government-sponsored enterprises 101 3 3 — 104 3

Foreign government 10 — 2 — 12 —

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States, municipalities and political subdivisions 2,600 274 77 29 2,677 303

Government-sponsored enterprises 123 3 3 — 126 3

Commercial mortgage-backed 215 13 14 3 229 16

United States government 146 3 41 2 187 5

Government-sponsored enterprises 7 — — — 7 —

Foreign government 25 1 4 — 29 1

Total $ 8,760 $ 706 $ 800 $ 202 $ 9,560 $ 908

At September 30, 2022, applying our invested asset impairment policy, we determined that the total of $1.115 billion, for securities in an unrealized loss position in the table above, was not the result of a credit loss.

During the first nine months of 2022, two fixed-maturity securities that were written down to fair value, due to an intention to be sold, and changes in allowance for credit losses were each less than $1 million.

During the first nine months of 2021, five securities were written down to fair value due to an intention to be sold, resulting in $1 million of noncash charges, and we had no allowance for credit losses.

During the full year of 2021, we wrote down five securities and recorded $1 million in impairment charges.

At March 31, 2023, applying our invested asset impairment policy, we determined that the total of $776 million, for securities in an unrealized loss position in the table above, was not the result of a credit loss.

During the first three months of 2023, no fixed-maturity securities were written down to fair value, due to an intention to be sold.

Changes in allowance for credit losses were less than $1 million during the first three months of 2023.

During the first three months of 2022, one security was written down to fair value due to an intention to be sold, resulting in less than $1 million of noncash charges, in addition to less than $1 million in changes in allowance for credit losses.

During the full year of 2022, we wrote down three securities and recorded $5 million in impairment charges.

At December 31, 2022, 3,272 fixed-maturity securities with a total unrealized loss of $908 million were in an unrealized loss position.

Of that total, no fixed-maturity securities had fair values below 70% of amortized cost.

Cincinnati Financial Corporation Third-Quarter 2022 10-Q

Of that total, 49 fixed-maturity securities had fair values below 70% of amortized cost.

Cincinnati Financial Corporation First-Quarter 2023 10-Q

The following table summarizes the investment portfolio by severity of decline:

3 unchanged sentences

gain (loss) Gross investment income

At September 30, 2022

At March 31, 2023

Taxable fixed maturities:

25 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk